Micro insurance products may escape service tax net

Deepshikha Sikarwar, TNNJan 9, 2008, 01.46am IST

NEW DELHI: Micro insurance products may get exemption from service tax. A proposal to this effect is being considered by the finance ministry to reduce the cost of Aam Aadmi Bima Yojana and Rashtriya Swasthya Bima Yojana — the flagship insurance schemes launched by the UPA government — by keeping them outside the service-tax net. An announcement on the exemption is expected in Budget 2008.

The insurance industry has been pitching for exemption from service tax on micro insurance products. While the plea was not accepted earlier, it may find acceptance now since a populist Budget is expected this year in view of the general elections in 2009.

Micro insurance products are targeted at low income groups — farmers and craftsmen — in the unorganised sector and the case for exempting them from service tax is quite strong. With a premium of Rs 200-500, the schemes provide a coverage of Rs 5,000-50,000. The products are available in various categories such as health insurance, personal accident cover, crop insurance and insurance for equipment.

Since the targeted population is from the low income group, the liability of 12% service tax is burdensome. Even if a company absorbs the burden of service tax along with the distribution costs, the premium becomes prohibitive. Industry experts opine that revenue loss on account of exemption to the products may not be huge, especially in comparison to the benefits derived by those targeted.

Aam Admi Bima Yojana was announced last year with a view to extend death and disability insurance cover to the unorganised sector. The scheme is managed by Life Insurance Corporation. Rashtriya Swasthya Bima Yojana is a health insurance scheme for below-poverty-line families and provides benefits of up to Rs 30,000.

The schemes' premium is to be borne by both the central and the state governments. The financial sector is one of the largest contributors to the service tax kitty, growing at 35%.